This study is designed to investigate the determinants of investment behavior in United States community hospitals. First, the decision by hospitals to acquire new capital equipment and facilities will be examined at the conceptual and theoretical levels. Formal models will be constructed and analyzed to identify hypotheses appropriate for empirical study. An important focus of this work will be to link market structure and performance, i.e., to examine the implications of interhospital competition for capital formation. Second, various empirical specifications suggested by the theoretical analysis will be estimated. Difficulties with previous research in this field will be circumvented by using an explicity dynamic framework and a new, relatively comprehensive, data set made available by the Commonwealth of Pennsylvania. Third, the empirical results will be evaluated in terms of both the hypotheses suggested by the theoretical analysis and the dynamic relationships that are observed within the systems. Finally, observed hospital behavior and the empirically estimated model will be examined to infer the set of objectives that institutions appear to pursue in their decision-making recent contribution to the theory of optimal control may be useful in making more rigorous and precise statements about both the nature and determinants of hospital objectives than has been possible previously.